While he focused extensively on the economic impact of Hurricane
Sandy for the region, his concerns for the labor market stood
out, and may have hinted that he's for more monetary easing.

From Dudley's speech, as prepared for delivery:

Even before the storm, though, the pace of U.S. economic growth
was disappointing—averaging only slightly above a 2 percent
annualized growth since the recovery began in mid-2009. As
a consequence, the national unemployment rate remains
unacceptably high, and its decline during the recovery has been
grudging. In addition, too many people are discouraged from
looking for work. This has depressed the participation rate and
held down the official unemployment rate. Moreover, 5 million
workers have been unemployed for six months or more. While job
growth has picked up some recently, its pace has been
insufficient to materially change the labor market picture.
...
So, what does “substantial improvement in the outlook for the
labor market” mean to me? A key point is that I will focus
on the labor market outlook, not just its current state.
Therefore, I will be looking at the growth
momentum within the overall economy and a range of labor
indicators, including the unemployment rate, payrolls, the
participation rate, the employment to population ratio and job
finding rates.

Until these indicators trend in a positive direction for a
sustained period, expect the continuation of near-zero interest
rates and quantitative easing from the Federal Reserve.

Good morning, I am pleased to be at Pace University to address
the university community of students, alumni, faculty and
university supporters. It is always a pleasure to speak
with academic audiences who I find to be particularly
well-informed and attentive. I thank you for inviting me here
today. In a timely note, I also want to commend Pace
University for fielding an excellent Fed Challenge team this
year. As many of you know, Pace won the Second District
College Fed Challenge this year and has just returned with an
honorable mention from competing in the nationals at the Board of
Governors in Washington, D.C.

Today, I want to talk a bit about the Fed—what we do and why we
do it. Then I’ll provide some thoughts about the national and
local economic outlook and monetary policy.

In covering the region and the nation, I will discuss the
terrible impact of Sandy on the region and the implications for
the national economy. I know I will fall short in fully
acknowledging all the hardship that our fellow citizens have
endured—including devastating losses of loved ones, homes,
communities and livelihoods—as well as widespread misery caused
by flooding and disruptions to power, fuel, food, transportation
and other services across the region. Nor will I be able to
fully commend the ways in which family members, neighbors,
co-workers and strangers have helped those in need. I am deeply
moved by the evidence of people reaching out and pulling together
across the region.

At the New York Fed we are committed to supporting the recovery
process. In addition to our economic analysis, we are convening
our advisory groups and other regional contacts to receive
first-hand accounts of the impact on communities, families and
businesses and to assess other ways in which we may help. For
example, we are holding a clinic in Staten Island to help people
obtain information about different types of financial support
that is available. We’re also encouraging banks to show
appropriate flexibility when dealing with small business and
other borrowers impacted by the storm.

After my remarks, I’ll be happy to answer any questions you have
about what the Fed does and why, and about the economic outlook.
But I won’t comment specifically on the upcoming FOMC meeting
next month.

As always, what I have to say reflects my own views and not
necessarily those of the Federal Reserve System or the Federal
Open Market Committee, also known as the FOMC.

What the New York Fed DoesBy way of
introduction, I will briefly review what my colleagues and I do
at the New York Fed. The New York Fed is one of 12 regional
Federal Reserve Banks that, together with the Board of Governors
in Washington D.C., make up the Federal Reserve System, our
nation’s central bank.

The Federal Reserve is independent within our government. By law,
we are charged with managing the nation’s monetary policy—taking
actions that raise or lower interest rates to promote full
employment and price stability. The Federal Reserve is also
charged with promoting financial stability, without which we
cannot achieve our economic objectives. We play an important role
in the nation’s payments and settlements system, which some
people call the financial system’s “plumbing.” For example,
we help ensure that banks’ ATMs have cash and that the checks you
write move the money to the recipient. In addition, we have a
specific mandate to promote economic development in each of our
regions.

As president of the New York Fed, I serve as the vice chair of
the FOMC, the Federal Reserve committee that meets eight times a
year in Washington to set interest rates and make decisions about
monetary policy. The members of this committee all strive
to achieve our statutory mandate of full employment and price
stability. Sometimes we have different views on the
specific policy choices at hand, and our policy decisions reflect
a full discussion of these differences. This diversity of
viewpoints is a key strength of the FOMC.

In fact, I believe we make better decisions as a committee
because we don't all think alike. But we are united in our
commitment to our dual mandate of maximum sustainable employment
and price stability and in our belief that preserving the
independence of the Federal Reserve in making monetary policy
decisions is very much in the public interest. That independence
allows us to make tough decisions based on data and
analysis—insulated from short-term political considerations.

At FOMC meetings, each Committee member presents a current
outlook for his or her District and for the nation. In
formulating these assessments, we consult with many sources—our
boards of directors, regional advisory councils, community
leaders and other key stakeholders. My meeting with you
today is part of this systematic effort to understand what is
going on at the grassroots level of our economy.

To add to what I learn from my conversations, my colleagues and I
at the New York Fed continually track conditions in our District,
and we have created special tools for that purpose. For example,
my staff tracks local household credit conditions, including the
amount and type of personal debt and whether repayments are
timely.

We also conduct a periodic poll about the credit needs of small
businesses, which are an important source of new jobs in the
District. If you represent a small business and would like to
participate in our next poll, please pass your card to my
colleagues, who are in the audience, or see me after the
speech.

To promote growth in our local communities, we publish extensive
data and analysis on the local economy. We provide outreach
initiatives, including workshops on access to global markets and
to help small businesses learn about loan programs and sources of
credit enhancements. We also run an annual video festival for
local college and university students. In this program student
teams produce videos that aim to help young adults make sound
personal financial decisions. A panel of advertising and video
professionals selects winning video productions for screening in
local movie theaters.

As you know, even regions as wealthy as ours have large pockets
of poverty. So, we target some of our work specifically to low-
and moderate-income groups.

We have worked hard to help neighborhoods that face high
foreclosure rates. This fall we hosted a conference on distressed
residential real estate to share new expert analysis with senior
policymakers and practitioners from across the nation. Later
today, colleagues from our Research department will provide a
press briefing on the housing outlook in our region as a whole.
Next week, we will be holding a workshop so we can better
understand the factors that are limiting the pass-through of
lower yields on agency mortgage bonds into primary mortgage rates
offered to borrowers. We will then be in a better position
to evaluate what steps if any might be taken by the relevant
authorities to contribute to greater pass-through.

Regional Economic ConditionsOur region's
economy was on a moderate upward trajectory before Sandy struck,
and while the storm had many severe effects—more on that in a few
minutes—I do not expect it to derail the region’s ongoing
economic expansion.

New York City's economy has been performing quite well.
Employment in the city reached an all-time high at the beginning
of this year and it has continued to grow briskly since then,
even without help from its key finance sector. While job
growth has been considerably more subdued in the surrounding
areas, such as Long Island, northern New Jersey, Fairfield County
and the lower Hudson Valley, many workers in these areas commute
to New York City for their jobs, so the strength here in the city
is helpful to the region as a whole. Still, the unemployment rate
in the city remains high, above 9 percent, and this is something
that needs to improve. Upstate New York's economy is also
on a generally positive trajectory, although some areas have
fared better than others. Albany, Buffalo, and especially,
Rochester and Ithaca have recouped many of the jobs lost during
the recession, whereas Syracuse and Binghamton have
lagged.

Looking beyond the employment statistics, I see other encouraging
signs across the region. Housing markets here have
improved. There has also been a noticeable pickup in
multi-family construction in both New York and New Jersey this
year.

However, the New York Fed's measures of regional credit
conditions suggest continued financial challenges for families
here. Data that we just released for the third quarter of
2012 show that for those individuals with a credit report,
average debt per person in New Jersey was about $61,000, and
about $49,000 in the state of New York. Overall debt per person
peaked in 2008. Although balances nationally have fallen by
over 11 percent, consumers in New York and New Jersey have
brought down their indebtedness more moderately, by 5 percent and
6 percent respectively.

While the overall delinquency rates are decreasing nationally,
delinquent balances in our region have remained stable or even
increased a bit. In both New York and New Jersey, nearly 9
percent of balances are 90 or more days delinquent, higher than
the 6.5 percent national rate.

Although there are some recent signs that home prices are
starting to firm, the housing crisis continues to take a toll on
our homeowners. Delinquency rates on mortgages, at 9.4 percent
and 9.7 percent in New York and New Jersey, respectively, remain
considerably higher than the 5.9 percent national
rate.

Before discussing the national outlook let me talk briefly about
the possible effects of “Superstorm Sandy” on the U.S. and
regional economy. The damage and disruptions from the storm
appear more extensive and longer-lasting than first
anticipated.

Of course, there is the physical damage, which was geographically
widespread, but particularly devastating in some communities
right here in New York City, including Breezy Point, the
Rockaways, and portions of Staten Island, and in so many cities
and towns along the Long Island, New Jersey and Connecticut
waterfronts, such as Long Beach, Seaside Heights, Spring Lake and
Hoboken.

Estimates of the costs of disruption to economic activity—that
is, services that couldn't be rendered and goods that couldn't be
produced because of protracted transit shutdowns, power outages
and other such damage produced by the storm—are particularly
difficult to pin down. Thus, it will be some time before
concrete figures are available. However, the early read
from recently-released data confirm these disruptions have been
widespread. Every one of the New York City area firms that
responded to our recent Empire State Manufacturing Survey—fielded
one to two weeks after the storm—indicated that the storm
disrupted activity at their firm, and 40 percent of them
indicated that they were completely shut down or severely
crippled for at least five days. Furthermore, the number of
workers filing initial claims for unemployment insurance in both
New York and New Jersey surged to more than triple their
pre-storm levels in the week after Sandy hit, suggesting at least
70,000 storm-related job losses in these two states thus far.

These data suggest that the disruptions that we have seen, and
continue to see, could be substantial. We can quantify the
losses in terms of days of lost output. Given the regional
GDP of $1.4 trillion, a rough calculation yields a loss of $3.8
billion for each full-day equivalent of lost output in the
region.

A considerable part of this lost activity will be offset over
time or be replaced by a temporary shift of activity from
hard-hit areas to less-affected places. But, in a services-based
economy, much activity cannot be shifted in time: restaurants,
for instance, can’t serve six meals a day to make up for lost
business. The fact that many people who would have dined in lower
Manhattan in the weeks following Sandy are instead patronizing
restaurants near their homes or near temporary work sites
represents an offset for the regional economy as a whole.
But that’s little consolation for the original restaurant, which
may in turn need to lay off some of its people or could even
possibly go out of business. And, of course, this applies even
more dramatically to businesses in hard-hit places along the
regional shoreline.

Against this, reconstruction began soon after the storm was over
and has likely intensified since then. The repair and
replacement of damaged or destroyed infrastructure, homes, and
businesses is likely to continue for some time. Programs will
need to be well designed in order to achieve maximum beneficial
impact. For instance, on the housing front, it will be important
to ensure that program design and funding recognize that our
region has a wide variety of housing types—including multifamily
and public housing—that are in need of repair post-Sandy.
In other words, one-size-fits-all solutions may not work well
here.

Past studies suggest that reconstruction spending provides a
powerful stimulus to local economies, both in its direct effects
and its associated multiplier effects. Thus, I expect that
reconstruction will provide a similar sizeable boost to our
regional economic activity, and one that is likely to continue
well into 2013.

All this analysis must be viewed as early and provisional.
Putting all the factors together, at present I expect that
economic activity in our region was adversely affected in October
and November, but will show a noticeable rebound starting in
December.

In addition to the economic costs in terms of lost activity there
are, of course, the costs in terms of human suffering to the
millions of people who were adversely affected—above all those
who lost homes and loved ones, but also the many others who were
cold and without power for days on end, spent hours getting to
and from work, waited on long gas lines, and experienced the
stress of not knowing what lies ahead.

We are also tracking the impact of Sandy on schools and students.
In New Jersey, 60 percent of schools were closed more than one
and a half weeks. The storm shut down all New York City schools
for a full week, and many schools across the region remained
closed the following week. Hardships borne by students and
families are also reflected in record low post-storm attendance
rates. The New York City Department of Education moved quickly to
relocate schools from damaged buildings to temporary premises,
enabling children to resume their studies. But even two
weeks after the storm, schools that had to be relocated had
attendance rates below 70 percent, a huge drop from their regular
rates of over 90 percent. Research shows that lost school days
and relocations can significantly impair student
learning.

The good news is that the situation is getting closer to normal
every day. Today, only 9 out of a total of 1,750 New York City
schools remain relocated. Also of particular importance is that
their leaders—administrators, teachers, principals and
others—have agreed to make up three and a half days of the lost
time. It is impressive that so many districts across the
region are working hard to make up for much of the lost
time.

Our region must learn the right lessons from this experience. The
storm revealed significant shortcomings in the resilience of our
public and private infrastructures in three critical areas:
power, transport and communications. This vulnerability
must be addressed.

National Economic ConditionsTurning to the
storm’s effects on the national economy, I expect a modest
negative effect on the annualized growth rate of real GDP for the
fourth quarter of 2012. It is impossible to calibrate this
precisely at this juncture, but I would guess this would be in
the region of 0.25 to 0.50 of a percentage point. It is important
to note that the storm affected much of the Northeast Corridor, a
densely populated area responsible for about 15 percent of GDP.
Normal economic activity in the final days of October and the
first few days of November was severely disrupted. The disruption
then began to subside, but only recently has life begun to feel
normal again. The negative effects of this disruption have
already been noted in economic indicators such as industrial
production for the month of October and initial claims for
unemployment insurance during the second and third weeks of
November.

Yet, some of the economic disruption experienced here was offset
to some extent by stronger than normal activity elsewhere.
For example, plants in Ohio or South Carolina making portable
generators may have worked overtime to fill the increased
demand. Second, some types of disrupted activity, such as
the purchase of a car or a housing start, can be made up before
the fourth quarter is over. Lastly, as I mentioned before, repair
and replacement of damaged property is already underway,
offsetting some of the earlier disruption. This rebuilding will
continue well into 2013, likely providing for somewhat stronger
growth than otherwise would have been the case. Indeed, economic studies of disasters in the
U.S. and other advanced economies find that the longer-term
effects on national economies have typically been
negligible. Given the resilience of the U.S. economy, I
expect the long-run effects of Sandy to be similarly
small.

Even before the storm, though, the pace of U.S. economic growth
was disappointing—averaging only slightly above a 2 percent
annualized growth since the recovery began in mid-2009. As
a consequence, the national unemployment rate remains
unacceptably high, and its decline during the recovery has been
grudging. In addition, too many people are discouraged from
looking for work. This has depressed the participation rate and
held down the official unemployment rate. Moreover, 5 million
workers have been unemployed for six months or more. While job
growth has picked up some recently, its pace has been
insufficient to materially change the labor market picture.

In terms of activity, there are a few bright spots. For
example, the growth rate of consumer spending was a bit firmer in
the third quarter. Another area showing improvement is the
housing market. Housing starts and sales of new and
existing single-family homes are trending up gradually.
Nationally, home prices have finally begun to rise.

However, on a more negative note, business fixed investment
spending fell some in the third quarter and new orders for
nondefense capital goods suggest continued softness.
Overall, manufacturing activity remains weak. This manufacturing
slump stems from slower growth abroad and uncertainties about how
the fiscal cliff in Washington will be resolved.

On the inflation side of ledger, despite sharp rises in energy
prices in recent months, overall inflation, as measured by
year-over-year changes of the consumer price index, is still
around 2 percent—significantly lower than last year. The signals
from underlying inflation pressures, compensation trends, and
longer-term inflation expectations are all fully consistent with
our longer-run inflation objective of 2 percent.

As you all know, in September, the FOMC took additional action to
promote a more robust recovery in a context of price stability—a
decision that was reaffirmed in October. In addition to the $45
billion monthly purchases of longer term Treasury securities
already scheduled to run through year end, the FOMC commenced
buying additional mortgage-backed securities at a rate of $40
billion a month. The Committee said: “If the outlook for the
labor market does not improve substantially, the Committee will
continue its purchases of agency mortgage-backed securities,
undertake additional asset purchases, and employ its other policy
tools as appropriate until such improvement is achieved in a
context of price stability.1

In terms of rate guidance, the Committee said it anticipated that
exceptionally low levels for the federal funds rate would likely
be warranted “at least through mid-2015"—emphasizing that a
highly accommodative stance of monetary policy would remain
appropriate for a considerable time after the pace of the
economic recovery strengthens.

So, what does “substantial improvement in the outlook for the
labor market” mean to me? A key point is that I will focus
on the labor market outlook, not just its current state.
Therefore, I will be looking at the growth momentum within the
overall economy and a range of labor indicators, including the
unemployment rate, payrolls, the participation rate, the
employment to population ratio and job finding rates.
Following the framework we set out in September, I will be
assessing the employment and inflation outlook in order to
determine whether we should continue Treasury purchases into
2013.

We will continue to do our part to push the economy towards
maximum sustainable employment in the context of price
stability. Yet, it is important to recognize that our tools
are not all-powerful—monetary policy is not a panacea for all
that ails our economy.

In particular, Congress and the administration must address the
“fiscal cliff” in a manner that creates a credible framework for
long- term fiscal sustainability. It is widely acknowledged
that the large fiscal contraction associated with going “off the
cliff” would drive the U.S. economy into recession. The
contractionary impact is likely to be larger than normal when
monetary policy is operating at the zero lower bound for interest
rates, as is the case today. Thus, fiscal consolidation
must be accomplished in a way that avoids derailing the economic
recovery. The best way to do this is to craft a plan that starts
small in terms of its near-term impact, then grows very
substantially over time as the economy grows healthier. Of course
this requires that the longer-term consolidation is truly
credible. It is also important that any plan have broad
bipartisan support so that that households and businesses
understand that it will in fact be carried out.

We saw in the summer of 2011 when the debt ceiling limit was in
play that a failure to come to grips with our nation’s economic
challenges and responsibilities can have a large effect on U.S.
household and business confidence. We do not want to repeat this
experience at the start of 2013.

Moreover, what happens will influence how we are perceived
abroad. When I meet with economic leaders across the
globe they do not doubt the underlying strength and dynamism of
the U.S. economy, or the entrepreneurialism and inventiveness of
our people. Nor do they doubt that we have the resources and
capability to overcome the challenges we face. But they do wonder
whether our political system is capable of putting the national
interest above partisan interests and making the tough choices
needed to address these challenges.

If a credible bipartisan agreement is reached, it will strengthen
global confidence in the U.S. and underscore to the world that
our country remains a great place to do business and invest in.
Failure would suggest a degree of political dysfunction that
could undermine U.S. economic leadership and could encourage
global corporations and investors to invest elsewhere.

Make no mistake: Credible fiscal consolidation will not be
painless, no matter what form it takes. The burden will be
felt across many sectors of the economy and we must expect that
the resulting fiscal drag will exert some restraint on economic
growth.

Nevertheless, there is no reason why a carefully crafted plan
would need to put the economic recovery at risk. A credible
plan, after all, would likely have very positive effects on
confidence. In particular, I believe that business
investment would respond positively to a credible plan.
More generally, reducing uncertainty over future tax rates,
entitlements and other spending programs has to be a positive
development in terms of reducing uncertainty that can constrain
economic activity. By clarifying the rules of the road, a
credible fiscal plan is likely to reduce the incentive of
households and businesses to delay spending and investment. This
would likely offset fiscal drag to a meaningful
degree.

ConclusionTo sum up, while it is still too
early for a precise estimate of the economic impact of Sandy, I
expect a negative impact on fourth quarter national and regional
economic growth, but a minimal long run effect nationally and
regionally. This has happened during a period where too
many people remain without the jobs that they need to help
support their families and themselves. Although the economy
continues to expand, we must grow faster if we are to put all of
our jobless workers and idle businesses back to work. Meanwhile,
price increases are likely to be at or slightly below our 2
percent longer-run objective over the next few years.

Many parts of our region were showing a stronger pace of growth
than the country as a whole before the storms hit—and I am
hopeful that Sandy will not have pushed us off this trajectory
for long. The recovery of housing markets are important part of
this renewed growth, although certain communities are still
weighed down by lingering high rates of delinquencies and
foreclosures and some others have suffered appalling damage from
Sandy.

Going forward, let me reiterate that the Fed will promote maximum
employment and price stability to the greatest extent our tools
permit, and we will stay the course. When we achieve a stronger
recovery in the context of price stability, I’ll view it as
consistent with our goals and not a reason to pull back on our
policies prematurely. If you’re trying to get a car moving that
is stuck in the mud, you don’t stop pushing the moment the wheels
start turning—you keep pushing until the car is rolling and is
clearly free.

Thank you for your kind attention. I would be happy to take a few
questions.